How To Get Out of Debt With A Debt Repayment Plan

We’ve often talked about how to get rid of debt. But this time, we’d like to cover an actionable plan comprised of simple steps you can perform to fully eliminate your debt.

While some families I know can pay off their credit cards each month, most people I know maintain mortgages, car loans, credit card and other debt. In the past, I felt like I was climbing a mountain that I’d never pay off, but I learned how to set up a debt repayment plan. The process isn’t too complicated to set up and with consistency, I found out that I could find zero balances at the end of my hike.

How To Get Out of Debt: Set Up A Debt Repayment Plan

Allow me to go through what I’ve done to set up my personal debt reduction program.

1. List your debts.

First off, I took all my latest billing statements and listed all my debts. If spreadsheets aren’t your thing, just start with the nearest sheet of blank paper and start writing down items like:

credit cards

auto loans

student loans

personal loans

medical bills

2. Find a lower interest rate for your debts if you can.

Debt consolidation is something I’m investigating for myself. You may want to consider consolidating your debt if it makes sense for your situation. If you have good credit, check on debt consolidation opportunities at Lending Club, a solid peer to peer lender. Or you can choose to commit to using a balance transfer credit card that offers 0% APR for a limited time — just make sure you pay off your balance before that intro rate period is up, or you’ll be stuck with some expensive credit card debt at much higher rates! If I do this right, this can certainly speed up my debt reduction process.

3. Add up your debts.

Next, I added the amounts I owed (from all sources) and the interest rate for each debt. For example, let’s say I owed the following:

Debt Name

Amount Owed

Interest Rate

Visa Credit Card

$15,000.00

18%

MasterCard Credit Card

$3,600.00

15%

Debt Consolidation Loan

$5,000.00

8%

Car Loan

$8,800.00

5%

Student Loan

$8,000.00

6%

While a grand total of $40,400 might make anyone woozy, I’m sticking with the program and focusing on the amount I want to repay each month. I then asked a debt calculator how long it would take to pay off my Visa if I paid only the credit card minimum payment due each month. When the calculator came back with an answer of 32 years, I decided I needed to pay more.

4. Set your monthly payment amounts.

So how did I cut down the payback time so I wouldn’t be in debt for the rest of my life? Here’s an “easy” approach: I first looked at the minimum amounts due for each of my bills, then came up with a grand total. For the list above, let’s say the minimum total amount for all my bills is $520. For each day of my debt management plan, I resolved to pay $520 each month.

Now over time, my balance should start shrinking, and eventually, my credit card statements will show a readjusted minimum payment; but I’m planning to keep paying $520 overall to shrink the debt in a reasonable amount of time. Once I finish paying off one debt, I need to apply the payment to the next debt in line, a tactic familiar to many of us thanks to Dave Ramsay’s Debt Snowball plan.

Highly recommended: If you want to be more aggressive about paying down your debt, you can always pay more than the minimum from the very beginning. For instance, you can hike up your total payment by 10% (i.e. pay 10% more than the minimum across all bills) and keep paying this amount till all your debts are retired. You’ll reduce your debt much faster this way!

5. Decide which debts to focus on first.

How can I decide which debts to pay off first? Some experts, like Suze Orman, have favored paying off the debts with the highest interest rate first. That benefits you because you’ll end up paying less money over time, if you do the math. Also, you may want to call your credit card company if you’d like to negotiate for lower interest rates.

However, Dave Ramsey argues that paying off the smallest debts first is going to give you the push you need to continue your plan. For example, if I had a smaller zero-interest hospital bill of $400, I could pay it off within months — and kick that worry out of my head all that much sooner. If I choose to tackle larger bills at a highest interest rate first, it may be a while before I retire this debt and feel like I’ve accomplished something.

6. Pay more whenever possible.

Five years or longer can seem like forever on a debt repayment plan. To reduce the amount of time spent on the plan, I learned to send in extra payments when I could, and eventually, I began to send in a larger amount on a regular basis. Cutting my other expenses helped, too. I became a frugal shopper for groceries and household items. In addition, I avoided trips to the mall so I wouldn’t be tempted to spend too much. For those with big debts, why not take second jobs? These other debt elimination tips are also worth trying out.

I’ve also discovered Paid Twice’s Snowflaking method. With snowflaking, no amount is too small to be applied to a debt repayment plan. If my credit card company doesn’t limit the number of times I can pay them online each month, then I can take the extra $5 rattling in my old PayPal account and send it in to the debt at the top of my list.

7. Find help if you need it!

Although many people can tackle their debt repayment plans on their own, you may decide that you need the structure of a debt counseling agency’s program. If you go this route, you may be able to check in with a counselor to discuss your questions or problems for free or for a nominal amount each month. The National Foundation for Credit Counseling can help you locate a credit counselor. CNN Money has a debt reduction tool to assist you, too!

Excellent article on creating a plan to get out of debt. I think the biggest step for most people is simply taking the time to write down how much debt they have. I created a spreadsheet with mine in it to handle balance transfer offers at zero percent, time to pay off, etc.

Any plan is better than most Americans have today. Keep up the great articles.

ShawandaJune 30, 2009 at 11:12 pm

I’m glad you mentioned Dave Ramsey. I used his plan to get out of debt. I really didn’t have much of a choice to make between paying debt with the lowest balance first or the one with the highest interest rate first. I owed almost $15K on a student loan at 1.625% and $10K on a car loan at 6.5%. Either way, I believe it was the “gazelle intensity” that really helped. It took a little over a year to pay off the debts and save up a 3-month emergency fund. I figured I could drag it out over 5 years or sacrifice and get it over with. I’m glad I chose the latter.

While watching my debt balances decrease, I became more intense. I guess I implemented the Snowflaking method when I claimed a $37 check from my state’s unclaimed property website to apply towards my debt.

Great post.

Mack jacksonJune 30, 2009 at 11:25 pm

According to me this is best post regarding get out of debt, we should have clear idea how much amount of debt we are having, so it is very much essential to prepare some spreadsheet or any other tools for debt.

Bulldog Gin Co.July 4, 2009 at 10:01 am

Have a question for you guys, that hopefully you can share your opinion with.

First of all, this is a great blog entry. Thanks.

I have $34,000 in student loans at an interest cost of only 2.6%. At the time (3 yrs ago), I locked that rate in, and I extended the repayment plan to 20 years. Hence, it only costs $220/month. I figure, why not since the rate is so low.

Even after rates have come down, i’ve got about 90% of my CASH locked up in a 4.1% yielding CD, and about $52,000 in a 1.5% savings account and brokerage account to trade the market.

My question is, What would you guys do if you were me? The $34,000 Student Loan is my LOWEST debt compared to my home mortgage at 4.6%, rental property mortgage at 5.25% (cash flow positive) and vacation home mortgage at 5.875% (which i don’t want to throw money at anymore since the market is so bad).

Would you guys try and payoff the 2.6% student loan using the snowball/flake method? Or, pay off the rental property mortgage of 5.25% (2nd smallest loan)? Or, any other suggestions ie don’t pay the student loan off b/c it is so cheap?

Thnx

DRJuly 10, 2009 at 4:53 am

Recently, my wife received a new Discover Card to replace an expired card, but she forgot she even had this particular card in her name! It turns out she used the card when she lived with her parents and even though she hadn’t used the card for several years, it was still active. We looked into it a little bit, and it turned out she had a 15,000 limit on it. Add that credit limit to another Discover Card, a credit card through our bank, and a mortgage in her name (she bought the house before we were married…

Financial ProblemsJuly 15, 2009 at 5:19 am

A very nice and well written post..
Acquiring students loan is pretty easy now-a-days and i got one from my nearest bank in just 2 months time period!

EMBAugust 2, 2009 at 9:22 am

I find the most important thing for getting control of your debt is being consistent with following your plan of action. It’s easy to get into a habit of missing payments but not so easy to break that habit.

Loan ComeNovember 12, 2009 at 1:31 pm

@ EMB: You’re right, being consistent with your plan of action entails the success of getting out in your debts. 🙂

Joe VencillJanuary 30, 2010 at 7:33 pm

I have a friend who asked me “If I can’t make all of my mortgage payment, due to unemployment, should I send in a less amount, or what I can?” Thanks,

@Joe,
If your friend plans to keep his house, he should do all he can to show he is serious about it. He needs to talk to his lender about his options. And ask them that very question you posed.

Tony @ Get out of debt bookJune 4, 2010 at 3:07 pm

@ Joe, Silicon Valley Blogger is correct. Anybody who wants to keep their house, they should contact their lender and explain them what the situation is, and tell them how much money they can send. The lender will see that you are trying your best instead of hiding. Some lenders are being very considerate since they will lose a lot more money by allowing the house to go into foreclosure.

Michael Harr @ Living TodayForwardSeptember 16, 2011 at 7:20 am

@Joe – Communication with the mortgage lender is extremely important. If your friend regains full employment within six months or so, the lender might be willing to do a loan modification where all of the back payments are added to principal, but the contract starts fresh (and usually at a better interest rate). There are other options, but loan mods are very popular with lenders right now as they work well in addressing short-term income disruptions.

William J. BondJune 11, 2012 at 3:27 pm

Dear Joe: The key to paying debt is setting up a amount you can pay down each month. Stick to it. Get the smallest one paid off, and then apply that money to the next largest credit card, and keep doing this when you can’t really afford to do it. Before long, you have 2-3 paid off and you’ll begin to feel like a champion — continue this strategy until everything is paid off. Congratulations. Now pay each credit card monthly — and you’ll never have any credit card debt.

Good luck.
William J. Bond Author of a Million words in print and online publishing, and many BOM books, and series of book with McGraw-Hill